How Open Banking Can Upgrade The Banking Experience

When Apple launched its App Store in 2008, it transformed how software was created and distributed. This business-model innovation gave every smartphone user the ability to create their own bespoke suite of programs to serve their every whim. People no longer had to settle for the programs that came on their devices — and I’m old enough to remember when the cool Nokia flip phone only came with one game: Snake. Now Apple and Android users can add games, entertainment and any number of productivity tools from a bazaar filled with tens of thousands of choices. Banking is now on the cusp of experiencing a similar revolution as a growing number of institutions embrace the idea of open banking — where banks partner with third parties to offer customers a wider (and more easily customized) set of services.

A good example is Fidor Bank’s new FinanceBay, an open-banking platform where customers can compare and select among banking products in an app store. Fidor wants to attract the best services from fintechs, giving those firms access to a new customer base, while giving the customer an app-store-like experience that allows them to select products ranging from person-to-person payment apps to insurance products.

Fidor is not alone in following this path. Large banks around the world plan to make major investments in open banking by 2020, according to an Accenture survey. Those investments will help take what has traditionally been a largely closed ecosystem and create opportunities for bilateral trade where banks can offer third-party products to their customers, but also make their own products and services available on other third-party platforms. This shift is possible because banks are opening their application programming interfaces, also known as APIs, to allow tech companies to securely integrate their services with those of a bank and vice versa. With easy access to third-party products on a plug-and-play basis, banks no longer need to develop all of their own products, from checking accounts to loans to loyalty programs. Instead, banks can offer a mix of homegrown and third-party products that integrate into a seamless experience for the customer.

Of course, this type of model changes the economic equation for banks. Traditionally, they would generate interest spreads and fee income from their own products, while in an open-banking world, some of that income gets replaced by new fees paid by partners who want to offer products on their platform. In taking the decision whether to sell “own label” or third-party products, the question is simple: Will we make more money being a platform for best-in-breed offerings or will we be more successful selling only our own products and taking all of the income while maybe sacrificing some level of differentiation? You see that trade-off play out in every physical Apple store, where they sell only their own computers and phones (high price and high margin), but also choose to carry best-in-class peripherals such as Bose noise-canceling headphones and Microsoft Office software.

Fidor’s partnership approach to open banking is made possible because it gives third-party app developers access to Fidor’s API sandbox to develop and test their services. Thanks to those shared APIs, Fidor already has a suite of optional services from other firms, as disparate as global money transfers and precious-metal trading. Another way to think about it: This buffet approach allows banks to cook the main dishes in the meal (maybe provide current accounts and mortgages) while letting others prepare starters, salads and desserts. For smaller banks or startups, it may even be attractive to outsource all of the cooking and only focus on running the restaurant. To enable this model, Fidor has made its FinanceBay app store available to other banks as a white-label service, allowing all banks the ability to embrace open banking with less investment.

The reasons for letting third parties do some of the cooking can be varied. In some cases, the bank simply may not be able to offer the product; for example, if a bank doesn’t have any foreign exchange capabilities, it can simply add TransferWise’s offering. But a bank may also decide that in areas like lending, it doesn’t want to take the risk of extending credit to a particular group of customers, such as in subprime auto lending. In those cases, the bank may be happy to partner with a specialist lender who is willing to take the risk and make that product available through the bank’s platform. This allows the bank to serve a broader set of customer needs without increasing balance-sheet risk while also earning fee income from making the referral. This approach can also benefit fintechs, which can focus on creating great products and selling them to the bank’s customer base rather than having to market directly to end users, turning fintech from a B2C business into a B2B2C business model that can scale more quickly.

The plug-and-play world of open APIs really took off with the advent of Apple’s App Store in 2008. It will blossom in the banking world when the firms that make the equivalent of the iOS operating system — the core banking systems — embrace the idea and open their APIs to fintech innovators. That’s starting to happen — for example, Temenos, a leading core banking platform player, has opened its MarketPlace, through which fintechs can offer innovative tools and services to banks on the Temenos platform.

In this new way of building banks, brands will still need to work to ensure that their customer experience is good enough to retain those relationships. After all, if every bank can plug-and-play the same additional products and services, they may all start to look the same, like malls from Singapore to Dubai. Here, banks can learn from Apple and Amazon, two companies that have fervently loyal customers because they have created compelling customer experiences that are incredibly easy to use and provide platforms that offer best-in-class products; they are also constantly evolving to offer more and better services. Before long, we may see similar success stories emerge in the world of banking.